The Government and Bank of England are putting in place billions of pounds worth of emergency lending facilities for Britain’s banks to prepare them for a Greek euro exit.
In two key speeches at the Mansion House, the Chancellor and Bank of England laid out plans for extraordinary new facilities to pump cash into the banking system. The Chancellor also said that it may take a Greek exit to push the Eurozone into closer union, while the Bank Governor signalled that he may be ready to support more quantitative easing.
The details are dense and complex, and there’s lots buried in the policymakers’ two speeches, so perhaps best to lay them out in checklist form:
- The Bank of England will activate two new lending facilities which, taken together look something like the Long Term Refinancing Operations (LTRO) carried out by the European Central Bank when the single currency came near the brink in December. They consist of:
1. The catchily-named Extended Collateral Term Repo Facility (ECTRF, I guess) which will lend banks “not less than £5bn a month” in cash in exchange for a wide variety of loans for a period of six months. Although that six month term is shorter than the three-year loans the ECB has been handing out, as with the LTRO, there is no ceiling, meaning banks are likely to withdraw tens (if not hundreds) of billions of pounds in these loans in the coming months.
2. A scheme called “funding for lending”, in which banks will be lent money by the Bank of England provided they prove that they will then lend an identical amount out into the wider economy. Again, there is no theoretical ceiling to this scheme, but Treasury officials say that a 5% increase in lending (which is what’s being aimed for) would be worth around £80bn.
3. These measures were pitched last night against a backdrop in which it looks increasingly feasible that Greece may leave the euro area. In his speech, the Chancellor said: “The political paradox Europe faces right now is this: some or all of these things are needed [fiscal union etc] for the existing countries in the eurozone to make their currency work, but it may take Greek exit to make it happen.
“That is a decision for the eurozone and the Greek people.
“One thing is for sure: if exit is the chosen route then the eurozone must have a very good plan in place to prevent contagion.
“The worst case for everyone would be exit without a sufficiently ambitious response.”
4. The Governor signalled that he may be ready to support more quantitative easing. This comes amid reports that central banks around the world may be ready to carry out a co-ordinated policy response in the event of a Greek euro exit. He said: “With signs of a deterioration in the outlook, especially in world markets, the case for a further monetary easing is growing.” While he added that he would not consider buying up loans or other assets (beyond government debt), some will see the Mansion House policies as a shift in his stance – the Bank will be taking a more active stance, taking loans and securities onto its balance sheet in exchange for a promise to lend money. That is the kind of policy Sir Mervyn would typically insist was the Government’s to carry out. That the Bank is involved will be seen as at least something of an about-turn on his part.
5. The measure might also be seen as a shift in policy for the Government. Political insiders are keen to dub it “Plan A to the max” but the reality is it is yet another policy designed to boost an economy which, despite all they’ve done and said in the past, is still in recession. It’s an acknowledgement that more needs to be done. Which in turn begs questions about the efficacy of all their previous policies (credit easing, loan guarantee scheme, plans to boost housebuilding & construction etc).
6. However, in a sense, the real story emerging tonight is that the tone on the Eurozone has changed. Not just in the UK. Every policymaker speech we’ve heard in recent days has seemed to signal an acknowledgement that Greece is on the brink of leaving the euro; that it’s almost a foregone conclusion. Whether that proves the case we’ll have to wait for the result of the Greek elections, and the subsequent G20 meeting in Mexico to find out.
